Gold Prices: Trump The Reason For Initial Gain And Later Drop In Price

Gold prices were up by about 4% to $1,316 an ounce on Tuesday night. This is a large jump for the metal, which is considered one of the safest assets to hold during a time of turmoil, notes Fortune. Even in early trading, gold glittered. But why this sudden surge in the price of yellow metal? The answer could be Donald Trump. And what’s interesting is that Trump is also the reason for the drop in gold prices immediately after the gain.

Photo by Pixel-Sepp (Pixabay)

Trump’s likely win forced users towards safe havens

According to Fortune, investors were desperately searching for safe havens Tuesday with Trump’s victory looking more likely. In addition to gold prices, the price of U.S. Treasury bonds also spiked for the same reason.

Investors sold stocks worldwide overnight, helping gold prices soar. The Mexican peso witnessed a massive sell-off, as the Mexican economy is believed to be most vulnerable to a Trump presidency. Mexico’s economy is very dependent on the U.S. Also Trump’s foreign policies appear a threat to the neighboring country, notes Fortune.

Many even believe that Trump’s economic policies like limiting immigration and imposing tariffs on China could slow down U.S. growth and in turn, lead to higher prices. Also Gold is usually seen as a safe bet against inflation, notes Fortune.

On Tuesday, hedge fund Bridgewater Associates warned that the stock market may drop by more than 10% if Trump won the election. So probably to cut on losses, investors ran for gold. Gold has time and time again proven its title of a safe asset. It is known to hold its value and even rise when other investments lose. Even during the Great Recession in 2008 and 2009, gold prices rose.

Trump’s “presidential” speech eased gold prices

On one hand, Trump’s shocking win encouraged investors to look for safe havens, but on the other, his victory speech — described by many as unexpectedly “presidential” – eased the anxiety, resulting in gold giving up most of its earlier gain, notes The Week. After touching as high as $1,337.40 an ounce early this morning, gold prices dropped below $1,300 an ounce.

According to the Financial Times, Trump sounded upbeat on the economy in his victory speech, easing the market’s worst fears. And this, according to The Guardian, triggered the end of the “Trump hump” for the pound and gold. Though it is still to be seen if his divisive rhetoric has faded, his economic investment program could surely strengthen the dollar and prevent any future rally in gold prices.

Kathleen Brooks of City Index said, “The first speech by President elect Trump has had a calming effect on the markets. This suggests that a win for President Trump is not yet America’s Brexit moment.”

According to The Guardian, Trump’s remarks were more pacifying compared to his pre-election talks.

“It’s because he sounded more presidential, there was no mention of ‘lock her up” or ‘build a wall’,” said Jeremy Cook, chief economist at money brokerage World First. “It was all, dare I say it, presidential.”

Along with gold prices, Trump’s comments helped steady the Dow Jones Industrial Average, which was expected to drop more than 800 points. It would have been a bigger drop than what it witnessed after the Brexit vote. After a volatile opening, the Dow is now in the green, and a positive U.S. open also lifted the FTSE 100. Germany’s Dax and France’s Cac were also up after experiencing sharp falls initially.

Some uncertainty too

However, many are still uncertain regarding how Trump’s era could actually turn out.

“Of course, just as Britain hasn’t yet Brexited, America hasn’t officially entered the era of Trump, suggesting that much of the trading that greeted the open was a gut-reaction rather than informed positioning, especially considering how thin on the ground the Republican’s actual policies are,” said Spreadex financial analyst Connor Campbell.

Trump is against the policy of keeping interest rates near zero. This indicates a monetary policy that could be bad for non-yielding gold, says The Week. However, a senior economist at Mizuho Bank, Vishnu Varathan, told Reuters that the Fed will likely defer its expected December rates rise in the short-term, and this might give some support to gold into the year’s end.

At 1449 GMT, spot gold XAU was up 1% at $1,287.73, while U.S. December gold futures GCv1 were at $1,289.90.

Author: Aman JainAman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com